This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

26 September 2011

Bankers’ Chutzpah

“Chutzpah” (with the “ch” pronounced as a hard “h”) is a word of Hebrew/Yiddish derivation meaning outrageous gall. An example of chutzpah, an old joke goes, is a young hoodlum who murders his parents and later begs mercy from the court because he is an orphan.

Bankers today are like that. The worst are here in the US. But the problem, like banking itself, is global.

Jamie Dimon is the CEO of JP Morgan Chase and one of the vilest scoundrels in the history of American business. He exemplifies the arrogant, clueless bankers who destroyed the global economy and expect their business and their exorbitant pay to continue as usual, with no accounting and minimal additional regulation. He wants American banks—including his, of course!—to be exempt from the more stringent capital reserve requirements that European regulators are proposing to stem the epidemic of gambling and swindling that has overtaken banking worldwide.

But Dimon is not alone. The crux of the European crisis that has caused the global panic du jour is quite simple. European bankers want nations and their populations, rather than them and their shareholders, to take the hit for their bad lending decisions.

As Bloomberg.com reports, the markets now rate Greek bonds at 40% on the dollar. But European bankers who hold those bonds insist on taking only a 21% “haircut.” And, with our own Treasury Secretary Tim Geithner leading the charge, they are likely to get away with foisting the rest of their losses on the EU’s public.

Who will take that hit? Ordinary people like you and me, just as in the US: government workers, those who rely on social safety nets, and taxpayers. And not just in Greece, but in Germany, France and Italy, too.

Why are the Dimon push and the EU bailout plan such outrageous examples of chutzpah? There are at least four reasons.

Second, the Dimon and EU plans contravene the basis of capitalism itself.

We know why labor merits pay. Labor is how people have made their living since the dawn of human civilization. But why does capital merit pay? Why pay someone just because they have money? Isn’t that just making the rich richer?

The classic answer—and the basis of our entire global capitalist system—is risk. Capital merits “pay,” i.e., a good return on investment, when invested money is at risk.

A person who puts money at risk to build a hotel, an airline, or computers—or to make a loan—advances commercial and often technological progress. That person employs others in gainful pursuits. In other words, the capitalist risks money to provide jobs and make social/economic progress. Taking a risk for good purposes deserves a return commensurate with the risk taken and the progress made.

But remove the risk, and there’s no justification for the reward. In rewarding capital that takes no risk, or in removing the risk ex post facto by bailouts, you simply steal from the poor to give to the rich. You become a reverse Robin Hood. That’s what bankers are asking us to do for them today, and that’s what we in the US have already done, big time.

The third reason to reject the Dimon and EU plans is moral hazard. To state the obvious, risk is risky. It can create loss, a dead loss of sunk investment. The Crash of 2008 taught us that. Trillions of dollars of value in stocks, mortgages and homes vanished because bankers took too much risk in funding liars’ loans and couldn’t pass that risk onto others (mostly other banks and governments).

Personal responsibility for one’s conduct and bad decisions is not just a moral imperative. It’s an economic one, too. Reduce personal responsibility for loss and people begin to take excessive risk, losing their money and ultimately yours and mine. That’s the meaning of the continuing bank bailouts over the last three years. And that’s the reason why people everywhere, including even the Tea Mob, have a right to be furious.

But the last straw is my last point: nationalism. Nationalism underlay all the last century’s bloodbaths. It’s a form of tribalism and a second cousin to racism. It’s something that— outside the soccer stadium—we must shed if we are to become fully civilized. Wherever it rears its ugly head, it makes trouble.

Nationalism was the primary impetus for our last Great War. That war could have extinguished our species if nuclear weapons had come a little earlier. Ever since, men and women of wisdom and good will have tried to reject nationalism and establish uniform, neutral and global rules of conduct.

That’s why we have Bretton Woods, the United Nations, the World Trade Organization, the International Monetary Fund and the World Bank. That’s why we have the EU itself. In slow but steady baby steps, were are tying to lay down transnational, global rules at least for commercial and economic conduct, so that nationalism and greed do not lead to war or economic collapse, as they did in the last century.

That effort is one of the most important features of modern civilization. It is essential is our species is to survive. Adapting to and fighting climate change will require the same sort of international cooperation that we now have in finance and trade.

So here we have this laudable, global trend toward international cooperation in many things. And up until recently, bankers have been part of it.

But now that they face responsibility for their gambling and swindling, now that their own exorbitant pay is on the line, they are eager to backslide.

Like the parricide who claims he’s an orphan, they tout the old human devil, nationalism. Banker Dimon wants American banks excepted from EU capital-reserve requirements because, well, they’re American and they’re therefore ours. Europe’s scoundrels rely on the national pride of Germans and the French to squeeze those freeloading Greeks with harsh austerity, while the bankers get off with only a fraction of the “haircut” they deserve.

You can already see the awful consequences of these scoundrels invoking the devil. Some are predicting the exit of Greece from the EU, the dissolution of the Eurozone, or even the breakup of the EU itself. The malefactors are willing to sacrifice the very EU they took so long to build—one of the crown jewels of human history and a bastion of human rights to rival our own—in order to protect bankers from their own bad decisions. That has got to be one of the worst-ever perversions of human values.

We are sliding into a global depression because of a massive, international failure of will. Bankers have gone rogue, not just here in the US, but globally. In refusing to accept the consequences of their bad behavior, they are flouting basic principles of human responsibility, economics and capitalism itself. And people who ought to know better—politicians, business people in the real economy, central bankers, and economists—are letting them get away with it.

We will not bring the global economy back into balance until we bring the errant bankers to heel. Even China, which has done a pretty good job of keeping its bankers under control, can’t help. It has, after all, less than a quarter of us. The global community has to step up and tell the parricide orphan “no, you don’t get mercy, excuses, bailouts or continuing bonuses for the problems that you caused.”

If anyone deserves a bailout, it’s the depositors and other innocent creditors of the errant banks. Make them whole, and you avoid runs on banks and financial panics. Make the bankers who caused the problem whole, and you penalize the innocent and undermine the global capitalist system.

FDR had the right idea eight decades ago with federal depositors’ insurance. Something like that, perhaps with wider sweep, is all we need to save our economic system, both here and in the EU. We don’t need to reward the parricide orphan.

2 Comments:

An even darker shadow, imo, is the way the banks and their team have avoided criminal prosecution in what now looks totally like a serves-the-wealthy-only "justice" system in the US.

If you or I knowingly presented a judge with forged documents and swore to their probity, all in the interest of taking away someone's home, we might expect to elicit more than a raised eyebrow. Not so for those foreclosing on homes, who seem able to do this with impunity (and worse, with success!) in almost every state in the nation.

Worse yet, the Obama administration has for months been orchestrating an attempt to formally issue a get-out-of-jail-free card for these unspeakable betrayers of all things American. Under the (faltering) deal, the banks would pay just a tiny fraction of the damage done, and escape prosecution or penalties.

Worse, the fine would essentially be paid with taxpayer dollars, costing the actual criminals nothing at all, much less than the hard time inside that they so richly deserve.

I agree that criminal prosecution would have some exemplary value both for bankers and the general public.

But criminal prosecution has problems. Legally, you have to prove a crime beyond a reasonable doubt. That's hard because top bankers always maintain a layer of plausible deniability. The wink, the nod, or the smile by which they approve or condone criminal behavior doesn’t shows up in e-mails or even clandestine audio recordings.

So they can always argue that they just didn’t know, or that they were hornswoggled by rogue employees. And all they have to do is convince a single juror to win.

Still more important, in my view, is the weak exemplary effect of prosecution on malefactors. Criminal minds always think, “I’m too smart to get caught. The ones who did were just careless.”

In contrast, the market doesn’t require proof beyond a reasonable doubt. It prosecutes greed, stupidity and dishonesty relentlessly. And it’s always on duty. No single human prosecutor can do as much.

So in my view, all we have to do is bring back market forces on bankers, stop them from gambling with depositors’ and other clients’ money (enforce and broaden the new Glass-Steagall law), and bail out no one but depositors and other worthy creditors.

When their own money, reputations, jobs and careers are once again on the line, bankers will be more circumspect. Prudence might even return to our finance sector. When was the last time you heard that word applied to bankers?

Not only would market forces and market discipline get rid of past malefactors. They would also deter future ones.

Our criminal masterminds are still unpunished. But they are also still running the show. I think that latter point is even more horrible than the first.

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This blog reflects a quarter century of study and forty years of careers in science/engineering (7 years), law practice (8 years) and law teaching (25 years). A short bio and legal publication list appear here. My pre-retirement 2010 CV appears here.
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